With home prices declining, do homebuyers cancel escrows more frequently?
- Yes, transactions are canceled more often (67%, 16 Votes)
- No, transactions are not canceled more often (33%, 8 Votes)
Total Voters: 24
This article explains how to avoid premature termination of a purchase agreement when objectives can be met by extending dates for events or activities to take place.
To read about when a buyer or seller may exercise their right to cancel the purchase agreement and terminate the transaction, see Part 1.
Foreseeable delays are ever present
Consider a buyer and seller who enter into a purchase agreement. They set a date to close escrow. Despite the buyer’s and all third parties’ diligence to clear all conditions leading up to closing, delays occur, making it impossible to close by the agreed-to deadline.
The alternatives for the seller are to cancel or agree to an extension of time to complete an activity or bring about an event. When permitted by provisions and activities establishing deadlines as essential to continuing the agreements, the seller may cancel the purchase agreement.
However, to meet the original objectives on entering into the purchase agreement, the seller has a discussion with the agents to determine whether to keep the transaction together. To proceed to closing, the additional time reasonably needed by the buyer, or others, to complete their performance is established. An extension of time sufficient for the buyer to perform is prepared and entered into by the buyer and seller.
RPI does not publish a form to extend a transaction’s closing date. Formal extension are usually unnecessary when using an RPI purchase agreement and typical escrow instructions. [See RPI Form 150]
RPI forms are deliberately engineered to be simple. The goal is to fully avoid all inoperative and unneeded language typically appearing throughout forms distributed by other publishers. Further, RPI forms eliminate provisions that are contrary to the very intention for entering into an agreement.
Building on the objective of plain wording and a need to be functional, RPI forms do not include a time essence provision such as included in other publishers’ forms (like those released by the California Association of Realtors (CAR)). Thus, while a specific form extending the closing date is not needed except to establish an extension of time as essential for cancellation, you may use a general addendum to amend or extend an existing agreement, or simply ask escrow to draw up an amendment addressing the extension. [See RPI Form 250]
RPI purchase agreement forms authorize agents to extend performance dates by up to one month, destroying any claim the performance deadlines are material or that written extensions are required. Also consistent are escrow instructions provisions. Instructions always permit the closing at any time beyond the date scheduled for closing.
By design, terminating an agreement by cancellation is not an available remedy until time becomes material by a written extension. [See RPI Form 150 §10.2]
Time to close extended by notice
To establish the right to cancel when time is not stated or established in the provisions of a purchase agreement or escrow instructions as reason alone for canceling, the person in default needs to be placed on notice — given a heads up — that the date set as the “new deadline” will be strictly adhered to.
Further, the person in default needs to be allowed a realistic period of time following receipt of a notice to perform before any cancellation is considered effective. Continued nonperformance past the new deadline date noticed will be treated as a default, and escrow may immediately be canceled. [See RPI Form 181-1]
For example, a purchase agreement calls for a buyer to close escrow within 45 days after acceptance. No time-essence clause, cancellation provisions or agent authorization to extend performance dates exist. [See RPI Form 150 §12.2]
The seller agrees with the buyer’s request to extend the date for closing an additional 30 days during which the buyer is to complete their arrangements to close escrow. Two days after the extension period expires, the seller cancels the transaction.
Is the seller’s cancellation of the transaction effective?
Yes! The 30-day extension agreed to establish a reasonable amount of time for the buyer to perform before the seller exercised their right to cancel. A further unilateral extension of time is not needed for the cancellation to be reasonable and effective. [Fowler v. Ross (1983) 142 CA3d 472]
The seller is on notice
Consider a purchase agreement containing a simple time-essence clause. No provision grants the agents authority to extend performance dates. The transaction is taking place during a downward cycle in sales volume and property prices (as is occurring during 2023).
Consistent with the time-essence clause in the purchase agreement, the escrow instructions authorize escrow to close at any time after expiration of the escrow period, unless escrow first receives instructions calling for the return of documents and funds.
The date scheduled for performance proves to be an inadequate amount of time for the seller to complete or bring about all of their closing activities. The buyer discovers they can buy a comparable home at a price lower than the price the seller is to be paid by the buyer.
One day after the passing of the date scheduled for closing, the buyer cancels escrow. Twelve days later, the seller, using diligence at all times, is able to clear title and close.
The seller challenges the buyer’s cancellation as premature and ineffective. The seller claims the buyer is required to grant the additional time needed to close escrow before the buyer may cancel the transaction and thus forfeit the seller’s right to enforce the buyer’s promise to purchase the property.
Is the seller entitled to the additional time needed to close escrow?
No! The seller was on notice by the existence of the time-essence clause in the purchase agreement and the wording of the escrow instructions that the buyer had the right to cancel on failure of escrow to close by the date scheduled. No provision in any document expressed an intent which was contrary to the time-essence provision in the purchase agreement.
Thus, the buyer’s cancellation, one day after the appointed closing date, was in accordance with the intent stated in the purchase agreement and escrow instructions, i.e., that timely performance was essential to the continuation of the transaction.
More importantly, escrow instructions authorize escrow to return deposited money and instruments on the demand of either the buyer or seller when the closing does not occur on or before the date set. Thus, the buyer was not required to grant the additional time reasonably necessary for the seller to close the transaction. [Ward v. Downey (1950) 95 CA2d 680]
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Intent in conflict with time-essence clause
Consider the opposite situation: a sale taking place during a rising-price environment.
A provision in the purchase agreement authorizes the agents to extend the time for performance of any activity for a “period not to exceed one month.” The purchase agreement also includes a boilerplate provision stating “time is of the essence.”
Escrow is for a 60-day period, the end of which is the appointed date for closing the transaction. As usual, the escrow instructions state escrow may close at any time after the date scheduled for closing, unless instructions to the contrary have been received.
On the date scheduled for closing, escrow is not in a position to close due to the buyer’s inability to immediately record their purchase-assist mortgage which was necessary to fund the price to be paid. The seller (seeing an opportunity to cancel and re-list at a higher price) immediately cancels escrow to terminate the transaction, claiming time was of the essence by agreement.
Is the seller able to cancel without giving an extension of time when both a time-essence and an authority-to-extend provision exist?
No! The bargain struck by the conflicting provisions controlling performance dates did not contemplate time for the occurrence of activities or events by their appointed dates to be so essential that the transaction may be cancelled on the mere passing of the appointed date.
The use of a purchase agreement (or escrow instructions) containing wording that “time is of the essence” does not allow for the forfeiture of contract rights on a failure to perform within the agreed time period when other provisions express a contrary intent which is consistent with the common objectives on entering into the agreement.
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Original bargain enforced
When logic permits, courts ignore boilerplate time-essence clauses and enforce the original bargain, if no financial harm results from the delay.
In the prior example, the purchase agreement (or escrow instructions) gave the agents the unconditional right to extend performance dates. Thus, being able to close by the date set for closing escrow is hardly considered crucial to the continued viability of the transaction. Also, the seller receives the full benefit they expected on entering into the agreement and incurs no loss on the delay.
Accordingly, the seller needs to give the buyer a reasonable amount of time to close escrow, i.e., the additional days needed to record the buyer’s loan before the buyer’s failure to perform justifies exercising the right to cancel. [See RPI Form 181-1]
When failure to fund is not a default
Before a buyer or seller may consider cancelling a transaction, the other person needs to have defaulted on their completion of an activity, or an event needs to have failed to occur.
On the date set for the close of escrow, buyers often have not deposited their down payment funds into escrow as called for in the purchase agreement and escrow instructions. When the deposit of closing funds or the lender’s wire of loan funds does not occur as scheduled, the buyer has not yet performed their obligation to close escrow. However, the failure to fund does not necessarily mean the buyer has defaulted on the purchase agreement, allowing the seller to cancel the transaction.
The question which arises for a seller who is attempting to cancel when agreed-to provisions state performance schedules are essential to the continuation of the transaction and the buyer or the buyer’s lender has not delivered closing funds, is whether the buyer is in default on the agreement, or is not yet obligated to deposit funds.
Escrow, as a matter of custom, will not call for a wire of closing funds from the mortgage lender or the buyer until escrow is in a position to close. Escrows, as an entirely practical matter, do not want closing funds sitting in an escrow which is not yet ready to close.
Specifically, before escrow will call for closing funds, the seller needs to have already fully performed by providing documents so the conveyance of title is able to be insured, and prorates and adjustments may be accounted for as called for in the escrow instructions. When the seller has not delivered instruments so escrow is in a position to close by the date scheduled for closing, escrow will not make a demand on the buyer or lender for funds.
Likewise, the buyer has no obligation to deposit further funds into escrow and is not in default before escrow requests funding. Until the buyer is in default due to a failure to timely respond to escrow’s request for funds, any attempt by the seller to cancel is premature and ineffective.
Escrow instructions usually state the buyer is to deposit funds for use by escrow provided the seller has performed. Thus, the obligation of the buyer to deposit closing funds is subject to the seller first performing, a condition precedent to the buyer’s performance. Therefore, the buyer’s “failure” to deposit funds before escrow is in a position to close is excused. [See RPI Form 150 §12.2]
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Consider a seller who is unable to convey title to a buyer and deliver a title insurance policy by the closing date called for in the purchase agreement and escrow instructions. The title company cannot issue a policy as ordered due to encumbrances affecting title which have not been released and the amounts needed for discharge and payoff have not yet been determined.
Here, the time for closing has arrived and the seller is not yet able to deliver marketable title as agreed. Thus, until the seller can obtain title insurance for their deed, the buyer is not in default for not yet depositing their funds.
Cancellation right waived by conduct
Even when the date scheduled for a buyer or seller to perform is stated as crucial, inconsistent conduct by the person entitled to cancel constitutes a waiver of their right to cancel. Once the right to immediately cancel has been waived, the person who failed to perform by the agreed deadline is no longer in default. Until the person who failed to perform is placed in default again, the right to cancel cannot be exercised.
For example, the date set for escrow to close arrives. The seller has not yet handed escrow clearances which are required before escrow may close.
A few days after escrow is scheduled to close, the seller deposits the clearances with escrow. The buyer deposits their closing funds on a call from escrow.
Two days later, the seller cancels escrow, claiming the buyer was in default since they failed to deposit their funds by the appointed date.
Here, the cancellation is ineffective and the buyer is entitled to close escrow. The seller waived their right to cancel, time having been of the essence, by conducting themselves without concern for the passing of the appointed date for closing. The seller failed to deliver documents or information sufficiently in advance for the buyer to meet the deadline. [Katemis v. Westerlind (1953) 120 CA2d 537]
Affirmative conduct and time as essential reinstated
A waiver by inaction does not occur simply because a person’s right to cancel the transaction is not immediately exercised on the failure of the other person to perform or an event to occur. Affirmative conduct inconsistent with enforcement of the performance deadline needs to occur by the person entitled to cancel, not just mere inaction, before the right to cancel in a time-essence situation is waived.
After a waiver of a date scheduled for approval of a condition or activity, time needs to be reinstated as crucial to the continuance of the transaction, or a reasonable, additional time period for performance must have passed after waiver of the right to cancel, before the transaction can be cancelled.
Time is best reinstated as essential to the continuation of the transaction by notifying the person who needs to perform that they are required to perform by the end of an additional period of time, set with sufficient duration as needed to provide them with a realistic opportunity to perform.
When performance is not forthcoming during the additional time period, the transaction may be promptly cancelled since strict compliance with the extension is now enforceable.
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